It’s an inflation-heavy week of data releases with Friday’s US Core PCE Deflator likely to be the main event. This is commonly quoted as the Fed’s favoured inflation gauge. That is because the data is broader in nature than the more well-known CPI figures, as it covers goods and services prices, plus spending from rural and urban consumers. Secondly, PCE basket weightings are updated more often and so can better account for consumer substitution –think new technology.
There is much hope that the important monthly PCE number will print with a one-handle, similar to the core CPI print last week which came in at 0.163%. It is something when we are watching these figures down to three decimal places, but markets are keen to justify their bets on two Fed rate cuts for this year. It’s worth repeating that this is more than the recent median dot plot of just one reduction seen by FOMC officials. Also worth remembering is that there are only two more Fed meetings before the November US Presidential election. Food for thought, as the greenback advanced north for three straight weeks and near to recent highs, but also strong resistance, above 106 on the Dollar Index.
May Australia CPI will be in the spotlight after the RBA discussed rate hikes at its last meeting. A 0.3% m/m decline mainly driven by seasonal declines in holiday prices could see the annual figure edge higher again from 3.6% y/y. Australian inflation hasn’t fallen on a monthly basis since it troughed in December 2023 at 3.4%. Pressure to respond with higher rates has to be growing, and we note there is still one more (quarterly) inflation reading at the end of July before the early August RBA meeting. AUD/USD remains stuck in a 0.66-0.67 range, waiting for a catalyst.
Tokyo inflation data for June also prints on Friday, like the US PCE figues. It is seen as a leading indicator for the national price trend, while participants will be eyeing the data to see if there is a further acceleration to the headline and core inflation readings seen last month. As a reminder, Tokyo Inflation in May printed mixed as headline CPI was firmer-than-expected while ex. Fresh Food CPI matched estimates. The acceleration in the headline and core readings in May was driven by higher electricity charges and is seen as likely to persist. However, underlying inflation moderated and is anticipated to continue doing so. That would spur doubts regarding the ability to sustainably achieve the BoJ’s 2% target which could cut the scope for the BoJ to hike rates further this year.
